What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-04 compared with 2023-02-06 · 111 added, 183 removed, 153 unchanged (66% of the section changed)

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The discussion below contains forward-looking statements, which are subject to safe harbors under the Securities Act of 1933, as amended (the Securities Act) and the Exchange Act.

Forward-looking statements include references to our ability to utilize our deferred tax assets, as well as statements including words such as “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “goal,” “intent,” “momentum,” “projects,” and similar expressions.

In addition, projections of our future financial performance, including trends in revenue, costs of revenue, gross profit or gross margin, operating expenses, paying users, annual recurring revenue, average revenue per user, free cash flow, and the assumptions underlying such trends;

Forward-looking statements include statements that represent our expectations or beliefs concerning future events, including, without limitation, references to our ability to utilize our deferred tax assets, as well as statements including words such as “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “goal,” “intent,” “momentum,” “projects,” “forecast,” “outlook,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” and similar expressions.

In addition, projections of our future financial performance;

anticipated growth and trends in our businesses and in our industries;

the consummation of or anticipated impacts of acquisitions (including our ability to achieve synergies from the Merger with Avast), divestitures, restructurings, stock repurchases, financings, debt repayments and investment activities;

the consummation of or anticipated impacts of acquisitions (including our ability to achieve synergies from our acquisition of Avast), divestitures, restructurings, stock repurchases, financings, debt repayments and investment activities;

the outcome or impact of pending litigation, claims or disputes;

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anticipated tax rates, benefits and expenses;

the impact of inflation, fluctuations in foreign currency exchange rates, changes in interest rates, Russia’s invasion of Ukraine, the COVID-19 pandemic and other global macroeconomic factors on our operations and financial performance;

the impact of inflation, fluctuations in foreign currency exchange rates, changes in interest rates, Russia’s invasion of Ukraine and other global macroeconomic factors on our operations and financial performance;

and other characterizations of future events or circumstances are forward-looking statements.

These statements are only predictions, based on our current expectations about future events and may not prove to be accurate.

These statements are only predictions, based on our current expectations about

future events and may not prove to be accurate.

We do not undertake any obligation to update these forward-looking statements to reflect events occurring or circumstances arising after the date of this report.

These forward-looking statements involve risks and uncertainties, and our actual results, performance or achievements could differ materially from those expressed or implied by the forward-looking statements on the basis of several factors, including economic recessions, inflationary pressures and those other factors that we discuss in Part II Item 1A, of this Quarterly Report on Form 10-Q.

We encourage you to read that section carefully.

Gen is a global, leading provider of consumer Cyber Safety solutions, empowering over 500 million users in more than 150 countries.

Our portfolio provides protection across three Cyber Security categories:

security, identity protection and online privacy.

We help customers protect their computer and mobile devices from online threats, safeguard their identity and personal information and strengthen online privacy capabilities and functionalities.

Merger with Avast

On September 12, 2022, we completed the Merger with Avast with the issuance of 94,201,223 shares of our common stock to Avast shareholders and cash consideration of $6,910 million, which includes repayment of Avast’s outstanding debt.

In connection with the Merger, we changed our corporate name to Gen Digital Inc.

and became dual headquartered in Tempe, Arizona and Prague, Czech Republic.

Prior to the Merger, Avast was a global leader in consumer cybersecurity, offering a comprehensive range of digital security and privacy products and services that protected and enhanced users’ online experiences.

We believe combining Avast’s strength in privacy and our strength in identity creates a broad and complementary consumer product portfolio beyond core security and towards adjacent trust-based solutions.

We also believe the Merger provides greater geographic diversification and access to a larger user base and will accelerate the transformation of global consumer cyber safety.

All financial information related to Avast that is discussed below in key financial metrics, results of operations and liquidity and capital resources is inclusive as of the Closing Date.

These forward-looking statements involve risks and uncertainties, and our actual results, performance, or achievements could differ materially from those expressed or implied by the forward-looking statements on the basis of several factors, including economic recessions, inflationary pressures and those other factors that we discuss in Part II Item 1A, of this Quarterly Report on Form 10-Q and the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended March 31, 2023.

We encourage you to read those sections carefully.

There may also be other factors that have not been anticipated or that are not described in our periodic filings with the SEC, generally because we did not believe them to be significant at the time, which could cause actual results to differ materially from our projections and expectations.

All forward-looking statements should be evaluated with the understanding of their inherent uncertainty.

Gen is a global company powering Digital Freedom with a family of trusted consumer brands including Norton, Avast, LifeLock, Avira, AVG, ReputationDefender and CCleaner.

Our core Cyber Safety portfolio provides protection across three key categories in multiple channels and geographies, including security and performance, identity protection, and online privacy.

We have built a technology platform that brings together software and service capabilities within these three categories into a comprehensive and easy-to-use integrated platform across our brands.

We bring award-winning products and services in cybersecurity, privacy and identity protection to approximately 500 million users in more than 150 countries so they can live their digital lives safely, privately, and confidently today and for generations to come.

Fiscal calendar

We have a 52/53-week fiscal year ending on the Friday closest to March 31.

The three and nine months ended December 30, 2022 and December 31, 2021 each consisted of 13 and 39 weeks, respectively.

The three months ended June 30, 2023 and July 1, 2022 each consisted of 13 weeks.

Our 2024 fiscal year consists of 52 weeks and ends on March 29, 2024.

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The following tables provide our key financial metrics for the periods presented:

Three Months Ended Nine Months Ended

(In millions, except for per share amounts) December 30, 2022 December 31, 2021 December 30, 2022 December 31, 2021

Three Months Ended

(In millions, except for per share amounts) June 30, 2023 July 1, 2022

Net revenues $ 946 $ 707

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Net cash provided by (used in) operating activities $ 226 $ 215

(In millions) December 30, 2022 April 1, 2022

Cash, cash equivalents and short-term investments $ 812 $ 1,891

(In millions) June 30, 2023 March 31, 2023

Cash and cash equivalents $ 623 $ 750

Contract liabilities $ 1,709 $ 1,788

Below are our financial highlights for the third quarter of fiscal 2023, compared to the corresponding period in the prior year:

• Net revenues increased $234 million and Operating income increased $66 million, primarily due to revenue attributable to Avast and higher sales in our identity and information protection products, offset by FX headwinds.

• Net income decreased $37 million and Net income per share - diluted decreased 0.09, primarily due to an increase in interest expense associated with our new senior credit facilities and two senior notes.

Below are our financial highlights for the first nine months of fiscal 2023, compared to the corresponding period in the prior year:

• Net revenues increased $311 million, primarily due to revenue attributable to Avast and higher sales in our identity and information protection products, offset by FX headwinds.

• Net income decreased $282 million and Net income per share - diluted decreased $0.51, primarily due to the increase in non-operating other expense.

• Cash, cash equivalents and short-term investments decreased by $1,079 million compared to April 1, 2022, primarily due to the completion of the Merger and repurchases of our common stock, offset by proceeds from the issuance of the senior credit facilities and the two senior notes.

Additionally, subsequent to December 30, 2022, we made a voluntary prepayment of $250 million for our senior credit facilities, which was applied exclusively to the Term B Facility.

• Contract liabilities increased $423 million compared to April 1, 2022, primarily due to contract liabilities assumed as part of the Merger, partially offset by seasonally lower billings than recognized revenue during the period.

The Merger has altered the size and scope of our operations, impacting our assets, liabilities, obligations, capital requirements and performance measures.

We expect the key financial metrics and results of operations of the combined company to be materially different than the trends experienced during the three and nine months ended December 30, 2022.

As a combined company, we expect to achieve synergies, rapidly launch a broad and innovative product portfolio, expand into new and diversified sales channels and enhance customer experience and retention.

Refer to Note 4 of the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for further information about this business combination.

Below are our financial highlights for the first quarter of fiscal 2024, compared to the corresponding period in the prior year:

• Net revenues increased $239 million and Operating income increased $101 million, primarily due to revenue contribution from Avast, which was acquired during the second quarter of fiscal 2023, and higher sales in both our consumer security and identity and information protection products, partially offset by unfavorable foreign currency fluctuations.

• Net income decreased $11 million and Net income per share - diluted decreased 0.04, primarily due to increased interest expense associated with our new senior credit facilities and two senior notes.

This was partially offset by increased Operating income as a result of our merger with Avast.

• Cash and cash equivalents decreased by $127 million compared to March 31, 2023, primarily due to cash interest paid, dividends paid to shareholders, voluntary prepayments of our Term B facility, a mandatory principal amortization payment of our Term A facility, and repurchases of our common stock.

• Contract liabilities decreased $79 million compared to March 31, 2023, primarily due to a seasonal decline in billings and fluctuations in foreign currency rates.

GLOBAL MACROECONOMIC CONDITIONS

Our results of operations and cash flows are subject to fluctuations due to inflation, changes in foreign currency exchange rates relative to U.S.

dollars, our reporting currency, as well as changes in interest rates.

Volatile market conditions related to Russia’s invasion of Ukraine and retaliatory sanctions against the Russian Federation and Belarus, the COVID-19 pandemic and other macroeconomic events have, at times, and may in the future negatively impact our results of operations and cash flows.

Conversely, we have seen and may continue to see cost savings from the shift to remote and distributed work for certain of our employees in areas including events, travel, utilities and other benefits.

dollars, our reporting currency, changes in interest rates, as well as recession risks, which may persist for an extended period.

Additionally, our international results are impacted by the economic conditions in the foreign markets in which we operate and by fluctuations in foreign currency exchange rates.

We conduct business in numerous currencies throughout our worldwide operations, and our entities hold monetary assets or liabilities, earn revenues, or incur costs in currencies other than the entity’s functional currency.

As a result, we are exposed to foreign exchange gains or losses, which impact our operating results.

As part of our foreign currency risk mitigation strategy, we have entered into monthly foreign exchange forward contracts to hedge foreign currency balance sheet exposure.

In addition, in early 2022, worldwide inflation began to increase.

In response to the heightened levels of inflation, central banks, including the U.S.

Federal Reserve and the European Central Bank, raised interest rates significantly in 2022, resulting in an increase in our cost of debt.

Interest rates continued to increase in 2023, and while inflation rates have slowed, global inflation remains high and has impacted our results due to higher costs.

Volatile market conditions related to Russia’s invasion of Ukraine and retaliatory sanctions against the Russian Federation and Belarus, and other macroeconomic events have, at times, and may in the future negatively impact our results of operations and cash flows.

Conversely, we have seen and may continue to see cost savings from the shift to remote and distributed work for certain of our employees in areas including real estate, events, travel, utilities and other benefits.

Due to our subscription-based business model, the effect of recent macroeconomic events may not be fully reflected in our results of operations until future periods, if at all.

For a further discussion of the potential impacts of the global macroeconomic conditions on our business, please see “Risk Factors” in Part II, Item 1A below.

banking market has also recently experienced increased volatility as a result of several distressed or closed banks.

While we have not realized any losses as a result of this increased market volatility, we continue to monitor the situation and will take appropriate measures, as necessary, to minimize potential risk exposure to our customers’ and our cash and investment balances.

While inflation, interest rates and foreign currency exchange rates may be less volatile in the second half of 2023, fluctuations in these indicators are uncertain and could result in further adverse impacts to our reported results.

For a further discussion of the potential impacts of the global macroeconomic conditions on our business, please see Part I, Item III and “Risk Factors” in Part II, Item 1A below.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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Management believes that the accounting estimates employed and the resulting amounts are reasonable;

however, actual results may differ from these

however, actual results may differ from these estimates.

Making estimates and judgments about future events is inherently unpredictable and is subject to significant uncertainties, some of which are beyond our control.

Should any of these estimates and assumptions change or prove to have been incorrect, it could have a material impact on our results of operations, financial position and cash flows.

Our critical accounting policies and estimates were disclosed in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended April 1, 2022.

There have been no material changes in the matters for which we make critical accounting estimates in the preparation of our Condensed Consolidated Financial Statements during the three and nine months ended December 30, 2022.

RESULTS OF OPERATIONS

The following table sets forth our Condensed Consolidated Statements of Operations data as a percentage of net revenues for the periods indicated:

Three Months Ended Nine Months Ended

December 30, 2022 December 31, 2021 December 30, 2022 December 31, 2021

Three Months Ended

June 30, 2023 July 1, 2022

Net revenues 100 % 100 %

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Percentages may not add due to rounding.

Three Months Ended Nine Months Ended

(In millions, except for percentages) December 30, 2022 December 31, 2021 Change in % December 30, 2022 December 31, 2021 Change in %

Three Months Ended

(In millions, except for percentages) June 30, 2023 July 1, 2022 Change in %

Net revenues $ 946 $ 707 34 %

Three Months Ended December 30, 2022 Compared with Three Months Ended December 31, 2021

Net revenues increased $234 million, primarily due to revenue attributable to Avast and an increase in sales of our identity and information protection products, offset by $34 million of foreign exchange headwinds, primarily in our consumer security solutions.

Nine Months Ended December 30, 2022 Compared with Nine Months Ended December 31, 2021

Net revenues increased $311 million, primarily due to revenue attributable to Avast and an increase in sales of our identity and information protection products, offset by $92 million of foreign exchange headwinds, primarily in our consumer security solutions.

Net revenues increased $239 million, primarily due to a $197 million increase in sales of our consumer security products and a $36 million increase in sales of our identity and information protection products.

This is inclusive of $9 million of foreign exchange headwinds, primarily in our consumer security solutions.

Performance Metrics

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Three Months Ended (2)

(In millions, except for per user amounts) December 30, 2022 (3)

September 30, 2022 (3)

December 31, 2021

(In millions, except for per user amounts) June 30, 2023 (3)

Direct customer revenues (1)

$ 818 $ 660 $ 624

Partner revenues $ 97 $ 72

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Direct customer count (at quarter end)

38.4 38.6 24.2

Direct average revenue per user (ARPU) $ 7.26 $ 8.58

(1) Direct customer revenues during the three months ended December 31, 2021 excludes a $2 million reduction of revenue, from contract liability purchase accounting adjustments.

(1) Non-GAAP Direct customer revenues differ from GAAP direct customer revenue during the three months ended July 1, 2022, as it excludes a $1 million reduction of revenue from contract liability purchase accounting adjustments.

We believe that eliminating the impact of these adjustments improves the comparability of revenues between periods.

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When changes occur, we recast historical amounts to match the current revenue channels.

Direct revenues currently includes Mobile App Store customers, and legacy revenues includes revenues from products or solutions that are no longer in operations in exited markets, have been discontinued or identified to be discontinued, or remain in maintenance mode as a result of integration and product portfolio decisions.

As such, the changes to historical revenue amounts and the other performance metrics, including direct customer count and ARPU, are reflected for all periods presented above.

(3) The performance metrics for the three months ended December 30, 2022 and three months ended September 30, 2022 include the revenues earned and customers acquired through our Merger with Avast.

Direct customer revenue currently includes Mobile App Store customers, and legacy revenues includes revenues from products or solutions from markets that we have exited and in which we no longer operate, have been discontinued or identified to be discontinued, or remain in maintenance mode as a result of integration and product portfolio decisions.

As such, prior period performance metrics have been recast to conform to the current period presentation for all periods presented above.

(3) The performance metrics for three months ended June 30, 2023 include the revenues earned and customers acquired through our acquisition with Avast.

ARPU is based on average customer count and assumes full quarter of revenue for both companies.

We define direct customer revenues as revenues from sales of our consumer solutions to direct customers, which we define as active paid users who have a direct billing relationship with the Company at the end of the reported period.

We exclude users on free trials and users who have indirectly purchased our product or services through partners unless such users convert or renew their subscription directly with us, or sign up for a paid membership through our web store or third party app stores.

We define direct customer count as active paid users of our products and solutions who have a direct billing and/or registration relationship with us at the end of the reported period.

Average direct customer count presents the average of the total number of direct customers at the beginning and end of the applicable period.

We exclude users on free trials from our direct customer count.

Users who have indirectly purchased and/or registered for our products or solutions through partners are excluded unless such users convert or renew their subscription directly with us or sign up for a paid membership through our web stores or third-party app stores.

The methodologies used to measure these metrics require judgment and are subject to change due to improvements or revisions to our methodology.

From time to time, we review our metrics and may discover inaccuracies or make adjustments to improve their accuracy, which can result in adjustments to our historical metrics.

Our ability to recalculate our historical metrics may be impacted by data limitations or other factors that require us to apply different methodologies for such adjustments.

We generally do not intend to update previously disclosed metrics for any such inaccuracies or adjustments that are deemed not material.

ARPU is calculated as estimated direct customer revenues for the period divided by the average direct customer count for the same period, expressed as a monthly figure.

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Net revenues by geographical region

Three Months Ended Nine Months Ended

December 30, 2022 December 31, 2021 December 30, 2022 December 31, 2021

Three Months Ended

June 30, 2023 July 1, 2022

Americas 66 % 72 %

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APJ includes Asia Pacific and Japan.

Percentage of revenue by geographic region in the three and nine months ended December 30, 2022 remains primarily in the Americas but is beginning to shift more into the EMEA markets, as the Merger with Avast has contributed to a stronger presence in those regional countries.

Percentage of revenue by geographic region in the three months ended June 30, 2023 remains primarily in the Americas but is beginning to shift more into the EMEA markets, as the acquisition with Avast has contributed to a stronger presence in those regional countries.

Cost of revenues

Three Months Ended Nine Months Ended

(In millions, except for percentages) December 30, 2022 December 31, 2021 Change in % December 30, 2022 December 31, 2021 Change in %

Three Months Ended

(In millions, except for percentages) June 30, 2023 July 1, 2022 Change in %

Cost of revenues $ 179 $ 102 75 %

Three Months Ended December 30, 2022 Compared with Three Months Ended December 31, 2021

Our cost of revenues increased $73 million, primarily due to a $46 million increase in the amortization of acquired intangible assets and $24 million increase in payment processing fees.

Nine Months Ended December 30, 2022 Compared with Nine Months Ended December 31, 2021

Our cost of revenues increased $92 million, primarily due to a $46 million increase in the amortization of acquired intangible assets, $29 million increase in payment processing fees, and $18 million increase in revenue share costs and royalty charges.

Our cost of revenues increased $77 million, primarily due to a $52 million increase in the amortization of acquired intangible assets, $15 million increase in payment processing fees, and $8 million increase in revenue share costs.

Operating expenses

Three Months Ended Nine Months Ended

(In millions, except for percentages) December 30, 2022 December 31, 2021 Change in % December 30, 2022 December 31, 2021 Change in %

Three Months Ended

(In millions, except for percentages) June 30, 2023 July 1, 2022 Change in %

Sales and marketing $ 181 $ 156 16 %

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Total operating expenses $ 405 $ 344 18 %

Our operating expenses increased in the three and nine months ended December 30, 2022 compared to the three and nine months ended December 31, 2021 primarily due to increased headcount, IT and facility occupancy costs, as well as efforts to realize cost synergies, in connection with the Merger which was completed during the second quarter of fiscal 2023.

Three Months Ended December 30, 2022 Compared with Three Months Ended December 31, 2021

Sales and marketing expense increased $23 million, primarily due to a $21 million increase of headcount, IT and facility occupancy costs.

Research and development expense increased $31 million, primarily due to a $23 million increase of headcount, IT and facility occupancy costs, $5 million increase of outside services and software expense and $4 million increase of stock-based compensation expense.

General and administrative expense decreased $31 million, primarily due to a $42 million legal accrual reversal relating to an ongoing contract compliance lawsuit, partially offset by a $11 million increase of headcount costs.

Amortization of intangible assets increased $40 million primarily as a result of the Merger with Avast.

Restructuring and other costs increased $32 million, primarily due to severance and termination benefit costs in connection with the September 2022 Plan.

See Note 12 of the Notes to the Condensed Consolidated Financial Statements for details of the fiscal 2023 restructuring activities.

Nine Months Ended December 30, 2022 Compared with Nine Months Ended December 31, 2021

Sales and marketing expense increased $40 million, primarily due to a $28 million increase of headcount and IT costs and a $11 million increase of stock-based compensation expense.

Research and development expense increased $31 million, primarily due to a $19 million increase of headcount and IT costs, a $7 million increase of stock-based compensation expense and a $6 million increase in outside services and software expense.

General and administrative expense increased $75 million, due to a $43 million increase of transaction and integration costs incurred in connection with the Merger, a $57 million legal accrual, of which $49 million was prejudgment interest, relating to an ongoing patent infringement lawsuit and the corresponding legal fees, and a $16 million increase of stock-based compensation expense.

This was partially offset by a $42 million legal accrual reversal relating to an ongoing contract compliance lawsuit.

Amortization of intangible assets increased $48 million primarily as a result of the Merger with Avast.

Restructuring and other costs increased $31 million, primarily due to severance and termination benefit costs in connection with the September 2022 Plan.

Sales and marketing expense increased $25 million, primarily due to an $11 million increase in headcount and IT costs, an $8 million increase in outside services and software expenses, a $3 million increase in our investment in advertising, and a $2 million increase of stock-based compensation expense.

Research and development expense increased $29 million, primarily due to a $15 million increase in headcount costs, a $9 million increase in outside services and software expense, and a $5 million increase of stock-based compensation expense.

General and administrative expense decreased $48 million, primarily due to a $53 million decrease in litigation cost and an $8 million decrease in IT and occupancy costs.

This was partially offset by an $8 million increase in headcount costs and a $6 million increase of stock-based compensation expense.

Amortization of intangible assets increased $40 million as a result of the acquisition with Avast.

Restructuring and other costs increased $15 million, primarily due to severance, termination benefits and other exit and disposal costs in connection with the September 2022 Plan.

See Note 12 of the Notes to the Condensed Consolidated Financial Statements for details of the fiscal 2024 restructuring activities.

Non-operating income (expense), net

Three Months Ended Nine Months Ended

(In millions) December 30, 2022 December 31, 2021 December 30, 2022 December 31, 2021

Three Months Ended

(In millions) June 30, 2023 July 1, 2022

Interest expense $ (170) $ (31)

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Foreign exchange gain (loss) 1 (1)

Gain (loss) on early extinguishment of debt — — (9) (5)

Gain on sale of properties 4 —

Other 4 (10) 10 (8)

Total non-operating income (expense), net $ (158) $ (32)

Three Months Ended December 30, 2022 Compared with Three Months Ended December 31, 2021

Non-operating income (expense), net, increased by $126 million in expense, primarily due to an increase in interest expense associated with our new senior credit facilities and two senior notes, all of which were issued during the second quarter of fiscal 2023.

Nine Months Ended December 30, 2022 Compared with Nine Months Ended December 31, 2021

Non-operating income (expense), net, increased by $300 million in expense, primarily due to the absence of the $175 million gain on sale of certain land and buildings in Mountain View, California during the second quarter of fiscal 2022 and an increase in interest expense associated with our new senior credit facilities and two senior notes, all of which were issued during the second quarter of fiscal 2023.

This is partially offset by a $4 million increase in interest income from higher interest rates on our money market funds, a

$4 million increase in rental income related to a rent review settlement with our tenant, and a $4 million gain on the sale of certain land and buildings in Dublin, Ireland.

Provision for income taxes

Three Months Ended Nine Months Ended

(In millions, except for percentages) December 30, 2022 December 31, 2021 December 30, 2022 December 31, 2021

Three Months Ended

(In millions, except for percentages) June 30, 2023 July 1, 2022

Income (loss) before income taxes $ 204 $ 229

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Effective tax rate 7 % 13 %

Our effective tax rate for income for the three and nine months ended December 30, 2022 differs from the federal statutory income tax rate primarily due to state taxes and the U.S.

taxation on foreign earnings, and certain discrete items this quarter including the tax impacts of internal restructuring, deductibility of transaction costs from the Merger, and the limitations of foreign taxes due to the increase of interest expense.

Our effective tax rate for the three and nine months ended December 31, 2021 differs from the federal statutory income tax rate primarily due to state taxes and U.S.

Our effective tax rate for income for the three months ended June 30, 2023 differs from the federal statutory income tax rate primarily due to tax benefits related to the set up and write-off of deferred tax items from an internal restructuring, partially offset by state taxes and the U.S.

taxation on foreign earnings.

Our effective tax rate for the three months ended July 1, 2022 differs from the federal statutory income tax rate primarily due to tax benefits related to the foreign currency remeasurement of an Irish deferred tax asset and discrete legal expenses booked during the quarter, partially offset by state taxes.

We are a multinational company dual headquartered in the U.S.

and Czech Republic, subject to tax in multiple U.S.

and Czech Republic, although our principal executive offices remain in Tempe, Arizona, and we are subject to tax in multiple U.S.

and international tax jurisdictions.

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Our results can also be impacted by the costs incurred and the potential deductibility of the expenses.

Any change in our mix of earnings is dependent upon many factors and therefore, is difficult to predict.

In connection with the Merger, we established $345 million of net deferred tax liabilities primarily related to the excess of book basis over the tax basis of acquired identified intangible assets.

The net deferred tax liabilities are based upon certain assumptions underlying our preliminary purchase price allocation.

Upon finalization of the purchase price allocation, additional adjustments to the amount of our net deferred taxes may be required.

Any change in our mix of earnings is dependent upon many factors and is therefore difficult to predict.

The timing of the resolution of income tax examinations is highly uncertain and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year.

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Historically, this has included a quarterly cash dividend, the repayment of debt and the repurchase of shares of our common stock.

Based on past performance and current expectations, we believe that our existing cash and cash equivalents, together with cash generated from operations and amounts available under our Revolving Facility, will be sufficient to meet our working capital needs, support on-going business activities and finance the expected synergy costs related to the Merger through at least the next 12 months and to meet our known long-term contractual obligations.

Based on past performance and current expectations, we believe that our existing cash and cash equivalents, together with cash generated from operations and amounts available under our Revolving Facility, will be sufficient to meet our working capital needs, support on-going business activities and finance the expected synergy costs related to the acquisition with Avast through at least the next 12 months and to meet our known long-term contractual obligations.

We are currently not aware of any trends or demands, commitments, events or uncertainties that will result in or that are reasonably likely to result in our liquidity increasing or decreasing in any material way that will impact our capital needs during or beyond the next 12 months.

However, our future liquidity and capital requirements may vary materially from those as of December 30, 2022 depending on several factors, including, but not limited to, economic conditions;

However, our future liquidity and capital requirements may vary materially from those as of June 30, 2023, depending on several factors, including, but not limited to, economic conditions;

political climate;

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The following summarizes our cash flow activities:

Nine Months Ended

(In millions) December 30, 2022 December 31, 2021

Three Months Ended

(In millions) June 30, 2023 July 1, 2022

Net cash provided by (used in):

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Cash from operating activities

Our cash flows provided by operating activities decreased by $215 million, primarily due to an increase in cash payments during the first nine months of fiscal 2023, including payments of federal income taxes, debt interest, and transaction costs and other regulatory closing fees in connection with the Merger.

Our cash flows provided by operating activities remained relatively flat.

Cash from investing activities

Our cash flows used in investing activities increased by $6,862 million, primarily due to the $6,547 million total cash consideration paid for the Merger with Avast, net of $363 million cash acquired and $2,141 million non-cash consideration transferred, as well as the absence of $355 million in proceeds from the sale of certain Mountain View, California properties during the first six months of fiscal 2022.

Our cash flows provided by and used in investing activities remained relatively flat.

Cash from financing activities

Our cash flows provided by financing activities increased $5,180 million, primarily due to proceeds from the issuance of debt, partially offset by repayment of debt and the continuation of our stock repurchase program.

The first six months of fiscal 2023 reflects $8,954 million of aggregate proceeds:

$3,910 million from Term Facility A, $3,690 million from Term Facility B, $900 million from the 6.75% Senior Notes and $600 million from the 7.125% Senior Notes, net of $146 million of debt issuance costs.

This was partially offset by the $400 million repayment of our 3.95% Senior Notes, $1,010 million repayment of our Initial Term Loan, $703 million repayment of our Delayed Draw Term Loan, settlement of the $525 million principal and $100 million equity rights associated with our New 2.0% Convertible Notes, and common stock repurchases of $904 million.

In contrast, the first three months of fiscal 2022 reflects $512 million of proceeds from the issuance of our Initial Term Loan, partially offset by the $364 million settlement of our New 2.5% Convertible Notes.

Our cash flows used in financing activities decreased $457 million, primarily due to the absence of the repayment of our 3.95% Senior Notes.

The first three months of fiscal 2024 reflects $150 million voluntary prepayment of Term B Facility, $83 million of dividends and dividend equivalent paid, $58 million principal amortization payments of our Term Loans and mortgages, and $41 million of repurchases of common stock, compared to the $400 million repayment of our 3.95% Senior Notes and $300 million of repurchases of common stock during the first three months of fiscal 2023.

Cash and cash equivalents

As of December 30, 2022, we had cash, cash equivalents and short-term investments of $812 million, of which $440 million was held by our foreign subsidiaries.

As of June 30, 2023, we had cash, cash equivalents and short-term investments of $623 million, of which $520 million was held by our foreign subsidiaries.

Our cash, cash equivalents and short-term investments are managed with the objective to preserve principal, maintain liquidity and generate investment returns.

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federal tax, however, these distributions may be subject to applicable state or foreign taxes.

On June 1, 2022, we fully repaid the principal and accrued interest under the 3.95% Senior Notes due June 2022, which had an aggregate principal amount outstanding of $400 million.

In addition, we paid $7 million of accrued and unpaid interest through the redemption date.

On August 15, 2022, we settled the $525 million principal and conversion rights of our New 2.0% Convertible Notes in cash.

The aggregate settlement amount of $630 million was based on $20.41 per underlying share into which the New 2.0% Convertible Notes were convertible.

In addition, we paid $5 million of accrued and unpaid interest through the date of settlement.

On September 12, 2022, upon close of the Merger with Avast, we entered into the Amended and Restated Credit Agreement (Credit Agreement) with certain financial institutions, in which they agreed to provide us with (i) a $1,500 million revolving credit facility (Revolving Facility), a $3,910 million term loan A facility (Term A Facility), (iii) a $3,690 million term loan B facility (Term B Facility) and (iv) a $750 million tranche A bridge loan (Bridge Loan) (collectively, the senior credit facilities).

The Bridge Loan was undrawn and immediately terminated upon the Merger’s close.

We drew down the aggregate principal amounts of the Term A Facility and Term B Facility to finance the cash consideration payable for the transaction and to fully repay the outstanding principal of $1,703 million and accrued and unpaid interest of $3 million under the Initial Term Loan and Delay Draw Term Loan from the existing credit facilities.

The Credit Agreement replaced the existing credit facilities upon the close of the transaction.

During the nine months ended December 30, 2022, we paid an aggregate $145 million in debt issuance costs associated with the senior credit facilities.

O n September 19, 2022, we issued two series of senior notes, consisting of 6.75% Senior Notes due 2027 and 7.125% Senior Notes due 2030, for an aggregate principal of $1,500 million.

They are senior unsecured obligations that rank equally in right of payment with all of our existing and future senior, unsecured, unsubordinated obligations and may be redeemed at any time, subject to the make-whole provisions contained in the applicable indenture relating to such series of notes.

Interest on these series of notes is payable semi-annually in arrears on March 31 and September 30 for both the 6.75% Senior Notes and 7.125% Senior Notes, commencing on March 31, 2023.

During the nine months ended December 30, 2022, we paid an aggregate $14 million in debt issuance costs associated with the two senior notes.

In connection with the financing provided for Term B Facility, we incurred customary ticking fees with respect to the undrawn commitments that began accruing on the 61st day post-syndication.

The ticking fees were accrued at the per annum rate of (i) 50% of the interest rate margin for adjusted SOFR (or applicable replacement rate) loans for 61-90 days from January 28, 2022, the syndication date, and (ii) 100% of the interest rate margin for adjusted SOFR (or applicable replacement rate) loans on and after 91 days from the syndication date.

Ticking fees were payable on the Closing Date of the transaction.

During the nine months ended December 30, 2022, we paid $31 million in ticking fees.

Subsequent to December 30, 2022, on January 19, 2023, we made a voluntary prepayment of $250 million for our senior credit facilities, which was applied exclusively to the Term B Facility.

Share repurchases

During the three and nine months ended December 30, 2022, we executed repurchases of 23 million and 40 million shares of our common stock, respectively, under our existing share repurchase program for an aggregate amount of $500 million and $904 million, respectively.

Merger with Avast

On September 12, 2022, we completed the Merger with Avast for a total cash consideration of approximately $6,547 million, net of $363 million of cash acquired and $2,141 million non-cash consideration transferred.

The cash consideration included repayment of outstanding Avast debt totaling $942 million.

See Note 4 of the Notes to the Condensed Consolidated Financial Statements for further information about this business combination.

We have an undrawn revolving credit facility of $1,500 million, which expires in September 2027.

Stock repurchases

During the three months ended June 30, 2023, we executed repurchases of 3 million of our common stock under our existing stock repurchase program for an aggregate amount of $41 million.

Material Cash Requirements

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Debt instruments

As of December 30, 2022, our total outstanding principal amount of indebtedness is summarized as follows.

As of June 30, 2023, our total outstanding principal amount of indebtedness is summarized as follows.

See Note 10 of the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for further information on our debt.

(In millions) December 30, 2022

(In millions) June 30, 2023

Term Loans $ 7,084

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The Credit Agreement contains customary representations and warranties and affirmative and negative covenants, including compliance with specified financial ratios .

As of December 30, 2022, we were in compliance with all debt covenants.

As of June 30, 2023, we were in compliance with all debt covenants.

See Note 10 of the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for further information regarding financial ratios and debt covenant compliance.

On February 2, 2023, we announced a cash dividend of $0.125 per share of common stock to be paid in March 2023.

On August 3, 2023, we announced a cash dividend of $0.125 per share of common stock to be paid in September 2023.

Any future dividends and dividend equivalents will be subject to the approval of our Board of Directors.

Share repurchase program

Stock repurchase program

Under our stock repurchase program, we may purchase shares of our outstanding common stock on the open market (including through trading plans intended to qualify under Rule 10b5-1 under the Exchange Act) and through accelerated stock repurchase transactions.

As of December 30, 2022, the remaining balance of our stock repurchase authorization was $870 million and does not have an expiration date.

As of June 30, 2023, the remaining balance of our stock repurchase authorization was $829 million and does not have an expiration date.

The timing and actual number of shares repurchased will depend on a variety of factors, including price, general business and market conditions and other investment opportunities.

Restructuring

In connection with the Merger, our Board of Directors approved a restructuring plan (the September 2022 Plan) to realize cost savings and operational synergies, which became effective upon the close of the Merger on September 12, 2022.

In connection with the acquisition with Avast, our Board of Directors approved a restructuring plan (the September 2022 Plan) to realize cost savings and operational synergies, which became effective upon the close of the acquisition on September 12, 2022.

We have incurred and expect to incur cash expenditures for severance and termination benefits, contract terminations, facilities closures, and the sale of underutilized facilities as well as stock-based compensation charges for accelerated equity awards for certain terminated employees.

As of December 30, 2022, we expect that we will incur total costs up to $280 million, with $180 million and $100 million estimated to be incurred within the first and second full years, respectively, following the completion of the Merger.

We expect that we will incur total costs up to $150 million, with $120 million and $30 million estimated to be incurred within the first and second full years, respectively, following the completion of the acquisition.

These actions are expected to be completed by fiscal 2024.

During the nine months ended December 30, 2022, we made $21 million in cash payments related to the September 2022 Plan.

During the three months ended June 30, 2023, we made $13 million in cash payments related to the September 2022 Plan.

See Note 12 of the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for further cash flow information associated with our restructuring activities.

Significant contractual obligations

The following is a schedule of our significant contractual obligations and commitments as of December 30, 2022, including those associated with the Merger with Avast.

The expected timing and amount of short-term and long-term payments of the obligations in the following table is estimated based on current information.

Timing of payments and actual amounts paid may be different, depending on the time of receipt of goods or services, or changes to agreed-upon amounts for certain obligations.

Short-Term Payments Long-Term Payments Total

(In millions)

Contractual obligations:

Debt (principal payments) (1)

$ 233 $ 9,974 $ 10,207

Interest payments on debt (2)

601 2,565 3,166

Purchase obligations (3)

Deemed repatriation taxes (4)

Operating leases (5)

Total $ 1,275 $ 12,996 $ 14,271

(1) As of December 30, 2022, our total outstanding principal amount of indebtedness is comprised of $7,600 million in Term Loans, $2,600 million in Senior Notes and $7 million in Mortgage Loans.

See Note 10 of the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for further information about our debt and debt covenants.

The Credit Agreement contains customary representations and warranties and affirmative and negative covenants, including a covenant that we maintain a consolidated leverage ratio of not more than 5.25 to 1.0, or 5.75 to 1.0 if we acquire assets or business in an aggregate amount greater than $250 million, and restrictions on indebtedness, liens, investments, stock repurchases, and dividends (with exceptions permitting our regular quarterly dividend and other specific capital returns).

As of December 30, 2022 , we were in compliance with all debt covenants.

(2) Interest payments calculated based on the contractual terms of the related debt instruments.

Interest on variable rate debt was calculated using the interest rate in effect as of December 30, 2022.

See Note 10 of the Notes to the Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for further information on the Term Loans and Senior Notes.

(3) Agreements for purchases of goods or services, with terms that are enforceable and legally binding and specify all significant terms, including fixed or minimum quantities to be purchased;

fixed, minimum, or variable price provisions;

and the approximate timing of the transaction.

These amounts include agreements to purchase goods or services that have cancellation provisions requiring little or no payment.

The amounts under such contracts are included because management believes that cancellation of these contracts is unlikely, and we expect to make future cash payments according to the contract terms or in similar amounts for similar materials.

(4) Transition tax payments on previously untaxed foreign earnings of foreign subsidiaries under the Tax Cuts and Jobs Act, which may be paid through July 2025.

(5) Payments for various non-cancelable operating lease agreements that expire on various dates through fiscal 2028.

The amounts in the table above exclude expected sublease income.

See Note 9 of the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for further information on leases.

Due to the uncertainty with respect to the timing of future cash flows associated with our unrecognized tax benefits and other long-term taxes as of December 30, 2022, we are unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authorities.

Our principal commitments consist of principal and interest payments related to our debt instruments, obligations under our purchase agreements, repatriation tax payments under the Tax Cuts and Jobs Acts and obligations under various non-cancellable leases.

Due to the uncertainty with respect to the timing of future cash flows associated with our unrecognized tax benefits and other long-term taxes as of June 30, 2023, we are unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authorities.

Therefore, $530 million in long-term income taxes payable has been excluded from our quarterly review of timing of contractual obligations.

There have been no material changes, outside the ordinary course of business, to the contractual obligations reported in our Annual Report.

For additional information about our debt obligations and certain other contingencies, see Note 10 and Note 18, respectively, of the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis